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  • Writer's pictureICMSS

China's Tech Crackdown Spooks Foreign Investors

The suspension of Chinese companies' IPOs (Initial Public Offerings) by the US SEC (Securities and Exchange Commission) has prompted China's securities regulator to summon a discussion with its American counterpart in order to find a suitable resolution. The suspension, which was caused by the increased disclosure requirements, occurred amid nearly a US$1 trillion share sell-off last week. As for now, the US regulator has indicated it will suspend Chinese companies until further improvement on risk disclosures. In contrast, the Chinese watchdog has called for mutual respect and collaboration on the issue. SEC Chairman Gary Gensler directed staff to seek additional disclosures from Chinese companies before signing off on their registration statements to sell stock in response to the same issue. He also expressed specific concerns about the structures – known as VIEs (Variable Interest Entities), which Chinese companies use for US listings, that are known to provide investors with an economic interest in the company's operations, excluding traditional ownership or voting rights. This will then lead to his opinion on how many investors were unaware that they were actually purchasing shares in shell companies based in tax havens rather than the underlying business. In fact, the outset of the overseas listings crackdown began after Didi Global Inc. was forced to list in the US, despite reservations from Beijing about the ride-hailing giant's data security. Following Didi's debut, Chinese officials announced an investigation into the company and banned its apps from Chinese mobile stores, causing a sell-off in the tech giant's shares as well as unprecedented losses for American investors. The two factors then fueled calls for greater oversight of Chinese IPOs.

The so-called “Didi effect” subsequently raised concerns among international investors ab